Community Property and Credit in Texas Divorces

August 16, 2018

If either you or your spouse make a purchase on
credit during your marriage in Texas, there is a
presumption that the credit utilized is community in nature. This would make sense
as all property that exists between you and your spouse at the time of
your divorce is considered to be community as well. However, there are
ways that you and your spouse can overcome that community debt presumption.

For example, you could provide paperwork that shows that a particular creditor
agreed only to look only at your credit history when extending credit
for a loan or credit card. This can be made easier if there is
marital agreement in place where you and your spouse formalize this arrangement but even
if you haven’t gone to these lengths it is possible to prove this
in court if necessary. There must be a clear demonstration that the creditor
has chosen not look at the credit of your spouse in order to do so. Plan
ahead and speak to the creditor about this possibility at the time the
loan is taken out.

Sharing Bank Accounts

Most spouses share bank accounts, from my experience at least. My wife
and I do. There are benefits for doing so including sharing in the financial
knowledge of your family and sharing accountability when it comes to spending.
These are concepts that will almost surely benefit you in your marriage
as financial problems lead to an inordinate amount of divorces in our
county. However, if you are going through a divorce the fact that you
and your spouse have shared bank accounts can be a problem.

The most obvious problem that I can think of is that a shared bank account
could potentially contain money that is both community property and separate
property. In the event that this property is
commingled then the presumption exists that community funds are taken out of the
account before the separate property funds. If you get to the point where
the community property funds are withdrawn completely, next it would be
the separate property funds that are taken out.

Deposits to the account would go towards replenishing the community property
income until it is totally restored to its prior amounts. To illustrate
this point a little further, let’s consider the following example.
Suppose that you have inherited $50,000 and opened up a savings account
with that money in mind. Your husband’s salary is also deposited
into this account until the balance reaches $70,000.

A family emergency comes up and the balance is withdrawn until it is only
$15,000. Years later you and your husband decide to get a divorce and
the balance at that time is $40,000. Despite the fact that the account
has been replenished nearly to its initial balance of $50,000, your separate
property interest would only be $15,000 which represents the lowest intermediate balance.

How is income from separate property treated in a divorce?

Income that is derived from
separate property is considered to be
community property under Texas family law. There are a couple exceptions to this rule that
we should go through. First off, you and your spouse can agree in writing-
before the marriage or during the marriage- that the income from a specific
separate property interest will remain separate property. The other exception
to the rule is that if there is a gift from you to your spouse then the
income from that property is your spouse’s separate property and
not part of the community estate.

The general rule that income earned from separate property is community
property leads us to a discussion about interest and dividends earned
on investments that are separate property. The earnings on these investments
is likewise considered to be community property. As it happens, investment
accounts can be invested into with commingled funds over the course of
years and therefore it can be difficult for you or your spouse to prove
that the investment is either of your separate property.

A piece of advice that could help you to show a court in a potential divorce
that your investment account is separate property would be to work with
your spouse on agreeing to a premarital property agreement. A premarital
property agreement would allow the dividends from that investment to remain
separate property rather than community property. If you or your spouse
have large investment portfolios then this is an especially strong idea,
in my opinion.

Likewise, if you are a business owner are and about to get married then
you may want to consider a premarital property agreement that provides
that your business is to be considered your separate property upon a future
divorce. This benefits you if the business grows in value and it helps
your spouse if you were to accumulate debt on the business. Either way,
it removes one potential source of conflict during the marriage and allows
you both to focus on other issues.

What is a premarital property agreement? Let’s discuss this issue
in greater detail.

Premarital property agreements

We’ve already covered the fact that there is a presumption that property
that you and your spouse have in place at the time of your divorce is
considered to be community property. If you are fortunate enough to be
a person with significant assets before your marriage then you may have
been advised to think strongly about a premarital property agreement.

A
premarital property agreement can clarify the nature of different assets and create a structure to your
property that can override the community property presumption. An agreement
must be put into writing and cannot an oral agreement or mere “understanding”
between you and your spouse. For instance, an agreement can set forth
that the income from separate property will remain separate property instead
of becoming community property.

The premarital agreement can also set forth the conditions for disposing
of property upon you and your future spouse divorcing. One thing that
the premarital property agreement cannot do is to limit either you or
your spouse’s obligation to pay child support in the future. If
you and your fiancé plan on negotiating a premarital agreement
it is advisable for each of you to hire an attorney in order to advise
you both on your rights under Texas family law.

Partitioning community property

A second frequently entered into agreement for spouses regarding their
community property is a partition or exchange of community property. A
partition works like this: one piece of community property can be partitioned
by a written agreement so that you and your spouse own a portion of that
property as your own separate property.

The partition agreed to does not have to be in equal shares, however. What’s
more you and your spouse can exchange community property interests in
different assets in order so that you can make one of the assets the separate
property of one of you into the separate property of the other spouse.
It is recommended that if real estate is governed by one of these agreements
that you record any change in ownership by signing and filing a new deed
to memorialize the change in ownership.

More on community property agreements in tomorrow’s blog post

We will continue our discussion on community property agreements and other
subjects related to community property in tomorrow’s blog post from
the attorneys with the
Law Office of Bryan Fagan, PLLC.

In the meantime, if you have questions regarding anything that you have
read today please consider
contacting our office to schedule a free of charge consultation. Our licensed
family law attorneys can sit down with you in our office to answer your questions
and discuss with you the solutions that our office can work with you on
as a client of ours. We represent families across southeast Texas and
would be honored to do so for your family as well.

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